Background:-The tax payer is a company incorporated in the United States of America (USA). It earned advertising and subscription revenues from sources in India during the year. Out of the said revenue, it also paid commission to an Indian agent.

The Assessing Officer (AO) assessed the income in the hands of the USA company holding that it has a permanent establishment in India and attributed 30% of net advertising revenue after allowing deduction of agency commission paid to the Indian agent. The tax payer preferred an appeal before the Commissioner of Income tax (Appeals) [CIT(A)]. The tax payer simultaneously applied for the resolution of the dispute by way of MAP under India-USA treaty. An agreement was reached to the effect that 10% of advertising and subscription revenue received during the relevant previous year from the Indian sources shall be deemed to be the net profit chargeable to tax in India.

The AO passed an order to give effect to the MAP resolution. The AO determined the total income of the tax payer at 10% of the gross receipts without reducing the commission paid to the Indian agent. Aggrieved, the USA company preferred an appeal before the CIT(A). The appeal was dismissed. The CIT(A) held that the competent authority determined the profit at 10% of advertisement and subscription revenue received during the relevant year and in the absence of any direction to determine profit on the basis of net amount, the claim regarding deduction of commission cannot be allowed.

The tax payer filed an appeal before the Income Tax Appellate Tribunal (ITAT).

Contentions of the Revenue

On whether an appeal can be filed against an order giving effect to a MAP resolution

The AO had passed the order to give effect to resolution under the MAP in accordance with section 90 of the Income Tax Act, 1961 (the Act). The said order passed could not be appealed against before the CIT(A) as the whole purpose of MAP is to bring the litigation to an end

On allowability of deduction and double taxation of commission

The resolution of USA competent authority had mentioned that correlative relief was granted in respect of income taxable in USA, therefore, there was no question of double taxation of the same amount

If deduction is allowed in respect of commission from the gross revenue receivable by the tax payer, then, the profit will not amount to 10% of the revenue received from Indian sources

Contentions of the Tax Payer

On whether an appeal can be filed against an order giving effect to a MAP resolution

It is within its right to challenge this order under the provisions related to filing of an appeal against the assessment order

On allowability of deduction and double taxation of commission

The deduction of commission paid to the Indian agent from the gross revenue was never an issue before the AO. The AO himself had calculated profit at 30% of the net receipt. The dispute under MAP proceedings was merely about the percentage to be applied to the net revenue, which was reduced to 10% under MAP resolution

The resolution of the USA competent authority is quite clear that the percentage had to be applied to the net revenue, in as much as the exact computation of profit was made by them for the year under consideration, in an annexure attached to the resolution

The Indian competent authority did not in any manner object to the computation of income made by the USA competent authority

Ruling of the ITAT

On whether an appeal can be filed against an order giving effect to a MAP resolution

The AO passed a rectification order to give effect to the resolution under section 90 of the Act. This order was in substitution of the assessment order passed earlier. Therefore, this is an assessment order in which the income of the tax payer has been computed by giving effect to resolution under section 90 of the Act

The AO did not fully give effect to the resolution of the competent authority. Since he has not done so, the tax payer was left with no other alternative but to approach the appellate authority for appropriate relief

On allowability of deduction and double taxation of commission

The resolution of the Indian competent authority is that the net profit will be calculated using advertising and subscription revenue received from Indian sources

The USA competent authority has also furnished the working of the profit for the year under consideration at 10% after deducting commission. This computation of income has not been objected to in any manner by the Indian competent authority

If AO had any doubt about the interpretation of the agreement, the best course for him would have been to approach the competent authority for clarification in the matter, more so when the computation of profit was annexed with the resolution of the USA competent authority. The agreement has to be given effect to because of the provisions contained in section 90. The effect to th resolution should be given as it is

Conclusion

The ITAT answered the question in favour of the tax payer by holding that an appeal can be filed against the order of the AO giving effect to the MAP resolution. Further, ITAT held that the percentage of 10% be applied to net income after reducing the commission paid to the Indian agent.